OTS recommends major shake-up of IHT Regime

The Office of Tax Simplification has today published its report into simplifying the UK’s Inheritance Tax rules.

The Office of Tax Simplification (OTS) has today published its report into simplifying the UK’s Inheritance Tax (IHT) rules. Following a consultation process, the OTS has made 11 recommendations for the government to consider, addressing three key areas of IHT:

  1. Lifetime gifts
  2. Interactions with Capital Gains Tax
  3. Businesses and Farms – Agricultural Property Relief (APR) and Business Property Relief (BPR)

Lifetime gifts

There are currently a number of exemptions from IHT relating to lifetime gifts. Most of these exemptions have not changed since the 1980s and need updating.  The OTS recommends that the various gift exemptions currently available should be simplified and consolidated and suggest the possibility of replacing these with a single, higher personal gifts allowance.

The OTS has further recommended that the government should reduce the “7 year rule” for lifetime gifts to 5 years and abolish taper relief. Lorraine Wilson, Solicitor at Weightmans LLP, comments that this would have a huge impact on lifetime estate planning for individuals and would also simplify the reporting requirements on personal representatives after a death.

Interactions with Capital Gains Tax

According to the OTS report, the government should consider removing the capital gains uplift on death where a relief or exemption from IHT applies (such as a spouse exemption, APR or BPR). Instead, the OTS suggests, the recipient of an asset on death should be treated as acquiring the asset at the historic base cost of the person who has died.  Lorraine Wilson observes that this could result in significant CGT liability for beneficiaries who dispose of assets at a later date, particularly where an asset has been within the family for several generations.  There could also be difficulties in obtaining historic valuations.

Businesses and Farms (APR and BPR)

As recommended in the OTS report, the government should review the requirements of what is considered ‘trading activity’ for BPR claims. Consideration should also be given to whether the IHT treatment of furnished holiday lets should be aligned with that of income tax and CGT, and whether it is appropriate for the level of trading activity generally required for BPR relief to remain lower than for holdover relief or entrepreneurs relief for CGT.

The OTS also recommends that HMRC review their approach to the eligibility of farmhouses for APR in sensitive cases, particularly where a farmer has been forced to leave the farmhouse to go into care. The current approach can penalise such individuals as a claim for APR could be denied. 

Lorraine Wilson comments that the OTS recommendations, if implemented, would represent a major shake-up of the current IHT regime. Individuals should keep their estate planning under review both whilst potential changes are considered and in the future to ensure planning remains efficient in light of the current rules.   The Treasury has said it would respond to the recommendations in due course.

Lorraine Wilson is a Solicitor in Weightmans’ Wills Trusts and Estates Team, if you have any queries regarding this article, please contact Lorraine on 0161 214 0532 or lorraine.wilson@weightmans.com.

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